For the full fiscal year 2012, Ralph Lauren had double digit growth across its major channels of distribution and geographic regions and achieved record operating earnings.
United States and Europe
The U.S. and European customers continue to be restrained in their luxury spending. Despite the political and social uncertainty in Europe, Ralph Lauren's revenue in Europe increased 26 percent. Five years ago, its sale growth in Europe was in the low teens. The fact that it is increasing sales during a challenging period validates its belief that there will be growth opportunities in Europe over the long term.
However, Ralph Lauren acknowledges the economic uncertainties in Europe is having an impact on the consumer there and that to some extent, the increase in business in Europe is attributed to tourism. Ralph Lauren is also seeing increased tourism from Brazilians in Florida and New York.
The factory channel is still performing well in Europe, but there is softness in the Ralph Lauren stores.
Asia
Ralph Lauren had strong growth in Asia, especially in Japan. It is building a presence in Asia, but is a multi-year process, as Ralph Lauren will not compromise on its real estate and brand standards. The mere presence in Asia will help Ralph Lauren gain exposure to the Asian tourist and help sales of its products in Europe and the United States. Although many other luxury brands report 25 to 40 percent of their European sales are to Chinese tourists, currently only 2 percent of Ralph Lauren's European sales are to Chinese tourists. In Asia, Ralph Lauren plans to focus on its own retail stores or shops-in-shops, rather than wholesale, so that it can better communicate to the customer, even though wholesale margins are much higher than retail margins.
Ralph Lauren started on a major brand repositioning effort in China and closed 95 points of distribution (60% of its network) during fiscal year 2012. It believes that the repositioning will leave it with a more brand appropriate presence. In the next 3 years, it will be opening 60 new stores in China in premier locations. It expects to open 15 of the stores in the second half of fiscal year 2013.
In South Korea, Ralph Lauren has closed and repositioned 30 concession shops, which is approximately 17% of its total Korean network.
More than one half of Ralph Lauren's Asian revenue comes from Japan. Sales were challenging in the first few weeks following the earthquake and tsunami, but they recovered quickly and gained momentum. Ralph Lauren believes it is successful in Japan because it reset its presence there 4 years ago. In the next few years, it intends to relocate and add concession shops.
Online commerce.
Ralph Lauren made a substantial investment in e-commerce in fiscal year 2012. It launched online Ralph Lauren stores in France and Germany and launched an online store for Club Monaco in the United States and Canada. It intends to launch an online store in Japan in the second half of fiscal 2013. It will continue to invest in e-commerce and believes it is a high growth channel. For example, it believes business from the online Ralph Lauren store in the United States will double and it will be expanding its capacity there to support the increased business.
Retail stores.
Ralph Lauren had accelerated productivity gains in its directly operated United States and Europe retail stores in the last 3 year, despite turbulent market conditions.
Wholesale
Ralph Lauren had strong performance in the United States with its wholesale partners at their retail stores, although its partners were conservative in terms of inventory and turn. The customer's interest in color is working well for the company.
Product lines.
Ralph Lauren gained market share in men's and children's clothing worldwide.
In women's clothing, Ralph Lauren has seen very strong performance in sportswear, dresses, accessories and footwear.
In fiscal year 2012, Ralph Lauren added to its denim collection. It introduced Black Label denim for men in its own stores and certain other specialty stores. This addition attracted a new customer to the brand. The company intends to add to the global distribution of Black Label denim soon.
Ralph Lauren also introduced Denim & Supply in the fall of 2011 to attract the younger, more trend-conscious consumer. It opened or converted hundreds of department store shop-in-shops and 4 freestanding stores for this product. At the same time, it is exiting Polo Jeans, which is mostly in international markets.
Ralph Lauren is growing its presence in handbags and small leather goods and is seeing strong performance of seasonal styles. The company has seen strong comp gains at existing locations. For instance, the Lauren Lifestyle assortment has reached double the distribution from the same time last year. Most of these products are sold only in Ralph Lauren stores, but since the reaction has been positive, Ralph Lauren is slowly expanding the distribution to a few existing shops at Bergdorf Goodman, Saks Fifth Avenue and Harrods. Handbags and small leather goods will be a key component to Ralph Lauren's strategy in Asia and the company believes it will be a strong driver of growth overall.
Future prospects
Ralph Lauren expects expenses to increase in the first half of fiscal year 2013 to supports its repositioning efforts in Asia, its investment in e-commerce and customer intelligence, and upgrading of its systems and infrastructure. It does not believe it will have the same growth as 2012 because of uncertainty in foreign exchange rates and the planned increased spending. It expects higher spending in the first half of the year with high resulting revenues in the second half.
Ralph Lauren is also concerned about the continuing near-term global economic trends, especially in Europe. Consumer sentiment is likely to be affected by the new political realities in Europe and the presidential elections in the United States.
Over the summer, Ralph Lauren will be a sponsor of the U.S. Open and British Open golf championships, the U.S. Open and Wimbledon tennis championships, Black Watch Polo and the London Olympic Games. It will sell merchandise specific to each event.
Evaluation of markets
Ralph Lauren notes that there has been start of another recession in most of Europe throughout the last few months. There is a lot of uncertainty in the southern tier of Europe, especially Spain. The northern parts of Europe are holding up better, but the uncertainty of the region as a whole will slow growth. Further, economic growth appears to be slowing in Asia. In the United States, economic recovery is uneven across many segments.
Financials
For fiscal year 2012, Ralph Lauren's sales increased increased 21%. International sales increased 33% in fiscal year 2012. European revenue increased 26%. Sales in the United States increased in the mid-teens. Comp store sales increased by 14 percent in fiscal year 2012. Ralph Lauren projects revenues to increase by the mid-single digits for fiscal year 2013. It expects low single digit growth in Europe and a four percent decline in Asia.
For Q4/2012, revenues increased by 14 percent. Overall comp store sales for Q4 increased 12% in the fourth quarter, with 30% growth at Ralph Lauren.com, 5% growth at Ralph Lauren stores, 10% growth at its factory stores and 14% growth at Club Monaco stores. The growth in comp store sales was a result of higher transactions and higher average dollars per transaction. For Q1/2013, Ralph Lauren expects net revenues to increase by low single-digits,
Gross profit margin in Q4 was 57.1%, an increase of 30 basis points over the prior year period. The improvement of gross margin was due to favorable channel and product mix, although it was offset somewhat by cost of goods inflation in the quarter.
Operating expenses rose 14% in Q4/2012, which was the result of sales growth and higher retail segment growth, which has a higher expense structure than Ralph Lauren's other business segments.
Q4 operating income increased by 16% and operating margin increased 20 basis points to 8.4%. Ralph Lauren expects fiscal year 2013 operation margin to be modestly higher than fiscal 2012 and expects pressure on operating margins in the first half of the year. It expects operating margins in wholesale to recover before its operating margins in retail.
Net income for Q4 increased by 29%, and net income per diluted share increased 34% to $0.99. The increase in net income was due to high operating income and lower taxes resulting discrete tax items. For fiscal year 2012, diluted EPS increased 24%.
Ralph Lauren ended fiscal year 2012 with $1.3 billion in cash and investments. It purchased 3.2 million shares of Class A common stock for approximately $395 million during fiscal 2012. At the end of Q4, it had approximately $577 million remaining under its share repurchase program. It also returned $74 million to shareholders in the form of dividends in fiscal 2012. Ralph Lauren recently doubled its cash dividend to $1.60/share annually. This is the third 100% increase in its quarterly cash dividend in 3 years. With regard to excess cash, Ralph Lauren's first priority is to invest is back into the company if it can get a return on that investment. Its second priority is to return the cash to shareholders through dividends and share buybacks.
The full transcript of the earnings conference call can be found on Seeking Alpha at the following link:
http://seekingalpha.com/article/608911-ralph-lauren-management-discusses-q4-2012-results-earnings-call-transcript
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